When Buffett was crazy and we were scared

Commentary: More people should have heeded the Oracle

By

DavidWeidner

Bloomberg News

More of us should have listened to this guy.

Just over five years ago, as global financial institutions appeared on the verge of collapse and stocks were sinking, legendary investor Warren Buffett wrote an op-ed in The New York Times that — at the time — seemed ludicrous. In the piece, he encouraged investors to buy.

Buy? Buffett, then 78, appeared to finally have succumbed to a senior moment.

Of course, it was great advice.

Unfortunately, not enough of us followed it.

“The financial world is a mess, both in the United States and abroad,” Buffett wrote. “Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.”

But in the midst of the panic, he added, he was buying stocks for his personal account.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Buffett wrote. “And most certainly, fear is now widespread, gripping even seasoned investors.”

We all know what’s transpired since. The Dow Jones Industrial Average
DJIA, -0.67%
has nearly doubled. It’s up 88% and closed Tuesday at a record high of 15680. The S&P 500 Index
SPX, -0.55%
has performed even better. It’s up 97% to above 1770.

Buffett was not only right — and right in a big way — about the buying opportunity. He was right about the fear. Most of us stayed fearful for too long. Yes, investors have come back, as the year-long rally suggests, but they’ve come back after most of the gains were made.

A survey released this week by asset manager BlackRock Inc. found that most Americans still are skittish when it comes to investing in anything. They keep 48% of their investible assets in cash, just 18% in stocks and 7% in bonds. One reason, BlackRock found, is that most Americans still feel overwhelmed by debt and bills. They spend 49% of their monthly income on bill and debt payments compared to 40% globally.

Now, there’s a feeling among investors that they’ve missed out. Thirty-six percent of respondents said they wished they’d started investing for retirement sooner.

But what’s alarming is there’s more. The fear persisted well into the market recovery.

Consider that year to date, investors have added $106 billion to equity funds, but it has hardly made up for the selling of the last three years. Since August 2010, investors have pulled $195 billion from equity funds, according to ICI — and that includes the recent buying.

And since Buffett told investors to buy? Investors have withdrawn $309 billion from total equity funds and a whopping $448 billion from domestic equity funds, according to ICI.

There’s really only one conclusion to draw from this. Despite Buffett’s reputation as an “oracle” of investing, we don’t listen.

And to be fair, there was plenty of evidence to ignore him. Less than six months after his advice was published, the S&P 500 fell another 24%. The Dow Jones Industrial Average sank 20%.

Even after the rally started slowly and surely thereafter, a series of events made stock investing appear dicey.

There was the Greek and European debt crisis. French, Cypriot and Italian bank crises. Falling home prices. The “flash crash” in May 2010. The federal government budget “sequestration.” There have been multiple stand-offs in Washington over the debt ceiling and, most recently, a government shutdown that put a kink in the recovery. And throughout it all, there’s been fear that the Federal Reserve’s monetary policy of easing and bond-buying would bring inflation.

Even Buffett’s main investing vehicle, Berkshire Hathaway Inc.
BRK.A, -1.11%BRK.B, -1.00%
reported that 2008 was its worst-ever year. The next year was better, book value rose 19%, but Berkshire stock languished. It didn’t reach its pre-crisis high of $147,000 until 10 months ago.

Yet none of these troubles really sank the broader market for an extended period of time. Volume was light in the markets, but what little action that was happening was predominantly buying. For those few who heeded Buffett’s advice, it’s been a very good five years.

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